Strategy for the Telecommunications, Media and Technology industries

Music streaming: Future business models

This past week saw RDIO, Spotify’s major rival in streaming music, file for bankruptcy. RDIO was arguably a superior service to Spotify in terms of user experience and music catalog but has failed to capture the market in the way Spotify (20M paying subscribers), Apple Music (6.5M subscribers) and Pandora (81.5M active listeners in 2014) have. The latter has been reported to be acquiring the ‘key assets’ of RDIO for $75M allowing Pandora to build a stronger, ad-supported radio service experience. Pandora’s management believes: “The result will be the industry’s best combination of streaming radio and subscription songs on demand.”

So…another music streaming service bites the dust. This despite streaming becoming the fastest growing segment of the music industry and the form that most industry leaders and pundits believe is the future of listening. Despite the popularity of the concept (renting, not owning music), it is clear that the business model of streaming is still in its infancy.

RDIO’s departure could be the first of many for streaming platforms. If this is the case, what is to become of streaming music as a business model? This post explores some of the possibilities for streaming business models and highlights those players best placed to capitalise on growth in streaming service demand.

Windowing – streaming as a secondary market

The current and most well known services like Spotify, RDIO (RIP), Apple Music and Google Play take a one-size fits all approach to music. You pay a subscription (~$10/mth) to have the privilege of listening to whatever you want in a catalog of (hundreds of) millions of tracks. One of the problems here is that music is treated like a commodity – all music is the same. For subscribers, there is no discretion regarding to which artist your $10 is paid (the majority may go to artists you don’t listen to) and for artists the rewards are small. The business model of pure streaming as evidenced by RDIO’s bankruptcy and Spotify’s inability to turn a profit is on shaky ground.

Windowing, a common practice with movies, allows artists to release their new albums to a market that is willing to pay for it directly (>$10) then after a period the music reverts to a streaming service for listeners on subscriptions. Arguably, Apple Music is best placed to capitalise on this model – with iTunes/Apple Music integration. A number of major artists are already beginning to use this strategy – Taylor Swift, Beyonce and this week Adele.

Enforcing scarcity on infinitely copyable media is a difficult task but not an impossible one. Swift, Adele and the other artists successfully employing a windowing strategy are already big. These artists don’t need to worry about selling out their concerts or reaching new listeners. However, it is a different situation altogether for musicians starting out, and the situation is particularly nuanced for artists in the middle for which windowing may be better. Those looking to get bigger could adopt streaming for free as a primary approach.

The ‘all you can eat’ streaming model has the downside of not being particularly attractive to artists and squeezing the profits of the streaming service and label. Niche services that specialise in a genre (e.g. classic, jazz, hip-hop) or a label (e.g. Blue Note, Columbia) which contain a deeper but smaller catalog of music may emerge as a profitable and viable alternative for many music lovers.

Equally, video streaming services (e.g. Netflix) offer clues for exclusivity in streaming. Apple has already begun to dabble in ‘exclusive’ content with Dr. Dre’s new album launching exclusively on the service and “Beats radio” and curated stations offering a compelling reason to join or pay a premium in the future.

Music plus – streaming as a bolt on

Access to music as part of a subscription to something else has yet to see huge success but there is potential in this model. Amazon Prime is the best example of this but other companies like DropBox, Ebay or Facebook could offer streaming music in this way.

Amazon Prime affords Amazon customers same-day delivery on all products, e-book rentals, cloud storage on photos etc. Bundling music into this service helps to create stickiness for Prime also offsetting the profitability issues seen by the major streaming services. Currently Prime members get access to 1 million tracks, which would not be considered a serious proposition for music lovers. Whilst this model is potentially more profitable, it is still treating music as a commodity and without the variety and depth of tracks probably best suited to the casual listener.

Multimedia streaming – cross-media streaming

Bundling of different content (e.g. music, video, live entertainment) is emerging as a new business model and potentially a very dominant one. As discussed in my last post, Google is uniquely placed to provide a multimedia proposition through YouTube Red. Although currently limited to U.S. users, YouTube Red includes unlimited access to Google Play Music and its supply of 35 million tracks. Google Play plus YouTube Red could make a phenomenal proposition for streaming overall.

We are at an inflection point for music streaming. Streaming as a concept has won the format battle but the business models that began the new form of music delivery are starting to feel the pressure from subscribers, labels and artists. New business models which balance the demand for music with artists’ needs (e.g. exclusivity, reach) as well as users’ preferences (e.g. niche, ‘all you can eat’, casual) or which smartly package music with other services or media offer new sustainable options for music streaming. The question is which streaming services will win the war.